An assessment of the inflation targeting experience

Abstract

This study examines the effectiveness of inflation targeting (IT) regime for fifty-four countries from 1960 to 2019. Two groups of countries are analyzed, the euro-area countries and most of the inflation-targeting countries. We divide our sample into two subperiods, the pre-euro and post-euro period for the first group as well as the pre-IT and post-IT period for the latter one. We then employ seasonal ARIMA, ARCH or GARCH models and using pre-period data we perform static forecast for the post-period. Subsequently, the forecasted inflation rates are compared with the actual levels of inflation. We find that a number of inflation-targeting countries have benefited from the said regime in terms of lower inflation, but in most cases, they experience higher variability. On the contrary, more than half euro-area countries do not experience lower inflation or variability after euro adoption.